Friday, November 14, 2014

Market Week Wrap-up

The S&P500 and the DJIA both pushed out to fresh record highs again this
week though trading volumes remained light. The fall earnings season is all but
over and this week featured major US retailers turning in decent but not
exceptional quarterly results. CPI and GDP data out of Europe confirmed that
the continent's sick economy is not seeing any marked improvements, although
the prelim German Q3 GDP q/q reading rose to +0.1% from -0.2% in the advance
reading, keeping Europe's largest economy out of official recession territory.
Crude prices sank to the lowest level in over four years as OPEC continued to
pretend that everything was fine in markets heading into a November 27th
meeting. World leaders attended the APEC summit in Beijing, where President
Obama and China President Xi reached a bilateral agreement to reduce carbon
emissions and member nations endorsed a roadmap for China's Free Trade Area of
the Asia-Pacific (FTAAP), Beijing's rival to the Trans-Pacific Partnership
(TPP) trade agreement. For the week, the DJIA gained %, the S&P500 rose %
and the Nasdaq added %.

President Obama called on the FCC to classify the internet as a utility under
Title II regulation (the same treatment given to phone companies), in an
attempt to shape the debate over net neutrality. The president's statement came
as FCC Chairman Wheeler was briefing members of Congress on his own concept for
net neutrality, based on a hybrid model involving elements of both utility-like
and free market regulations. House Republican leaders commented that placing
internet under title II regulation was beyond the power of the FCC. Time Warner
Cable lost as much as 10% and Comcast lost up to 6% in the two sessions
following the president's statement, before recovering.

Crude saw more dramatic moves to the downside this week, with crude futures
falling to 4-year lows with WTI around $73.25 and Brent below $78 by week's
end. The next OPEC meeting is coming up fast on November 27th and there is
still no clear indication that the organization will move to lower output.
Saudi Oil Minister Al Naimi called talk about an oil price war a
misunderstanding while Kuwaiti Oil Minister Ali Al-Omair said OPEC would not
change its production quotas. In its monthly report, the IEA said there was
more downside yet to come in oil prices, given market dynamics.

Ukraine was back in headlines this week as Russia and its anti-government
proxies in Eastern Ukraine were observed concentrating forces for what appears
to be a major offensive. NATO said it had seen multiple columns of tanks and
materiel arriving in the rebel provinces and Kiev has begun shifting more
forces to the east, even as artillery exchanges heated up. The September 5th
ceasefire agreement is looking increasingly hollow.

McDonalds October SSS were much better than expected, however comps in all
three of the company's regional divisions were still in contraction territory.
Recall that with third-quarter earnings, McDonalds CEO warned that October
comps would remain negative. On Friday, Jana Partners disclosed a new stake in
McDonald's giving investors hope that the activist may propose changes. This
comes after tons of speculation that the struggling Micky D's could be a big
target for activists.

Retailers Walmart and Macys had decent results for the third quarter which
encompassed the back to school season. Walmart's earnings topped expectations
and comps stayed in positive territory, although it narrowed its FY forecast.
On its conference call, Walmart said it would start matching prices with major
online retailers. Macys widely topped the consensus on earnings, although its
comps were negative and the firm trimmed its FY view. Both Walmart and Macys
made constructive comments about Q4 holiday business. Both stocks sustained
more than 4% gains through week's end. JC Penny and Kohls had problems in their
Q3 reports. Headline results from both names were below expectations, JCP's SSS
were flat, and KSS's comps were negative. JC Penny asserted that it was in the
"final stage" of its turnaround plan.

Alibaba did $9.3 billion dollars in orders on Single's Day (11/11), China's big
fall retail sales day, topping all estimates. Chairman Jack Ma said he was
happy with the results and even went as far as to say he hoped this new holiday
would become a global commerce event in the years ahead. The company also
announced it was looking to raise $8 billion in USD bonds, adding fuel to
rumors the e-commerce giant might do some shopping of its own. Shares of BABA
were volatile, seesawing through week's end after a solid month of gains in the
wake of the company's October IPO.

On the M&A front, BB&T Corp agreed to buy Susquehanna Bancshares for
about $2.5 billion in cash and stock. The deal gives BB&T a bigger foothold
on the East Coast. Berkshire Hathaway said it would acquire the Duracell
battery unit of P&G in a cash-and-stock arrangement valued at $6.4B. In
other deal talk, there were reports that Actavis was in talks to acquire
Allergan for around $210/share, as Vertex's flagging offer looks less and less
likely to succeed. Share of Baker Hughes gained sharply towards the end of the
week after the company disclosed it was engaged in preliminary discussions with
Halliburton about a possible combination.

EUR/USD bounced back and forth in the 1.2400 handle for most of the week in the
absence of any major Eurozone news. Final October CPI data and the second
reading of Q3 GDP data confirmed the wretched condition of the European economy
but held no big surprises. EUR/CHF fell to around 1.2010 on Friday from the
1.2030 level coming into the week. The Swiss National Bank's Jordan said the
bank would not abandon the 1.2000 floor for the foreseeable future and called
the peg the bank's most important tool for price stability. The SNB's resolve
may soon be tested as the Swiss referendum on central bank gold reserves takes
place on November 30th, and one poll out this week showed the vote was too
close to call, with 44% of respondents in favor of the initiative, 39% against
and 17% undecided.

USD/JPY declined to seven-year lows by Friday, topping out around 116.80 before
retracing a bit on Friday afternoon. Comments by government officials drove
speculation that the final decision on the next planned sales tax increase
could be delayed until after early elections, which PM Abe may call in December
in order to bolster his mandate. The Bank of Japan warned that any plan that
would delay the tax increase could make BOJ's decision harder by hurting fiscal
trust and diminishing the attractiveness of Japan's government bonds. The
rumors went back and forth all week making it hard to say whether PM Abe would
go ahead and actually launch early elections, although it appears that a final
decision would wait at least until after Monday's Q3 GDP results.

China published a raft of October economic figures last weekend. October CPI at
1.6% matched the lowest level since Jan 2010, with the food component at 2.5%
and non-food at 1.2%. Year-to-date CPI was unchanged from September, just above
the 2% level. October exports were still in surplus but imports were slightly
lower than expected. Subsequent reports suggested that the trade surplus was
driven by the contraction in import growth, domestic demand remains weak, and
destocking has led to decline in consumption of cement, coal, iron ore and
other raw materials. Thursday saw another round of October economic data drop:
industrial production was weaker than expected and power generation contracted
on a sequential basis for the third month in a row. China retail sales were
pretty soft, and slowed for the fifth moth in a row.